UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended ~~October~~July 31, ~~2018~~

2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No. 1-8061

FREQUENCY ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	11-1986657
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.	11553
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 516-794-4500

Securities registered pursuant to Section 12 (b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on

which registered

Common Stock (par value $1.00 per share)

FEIM

NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one)~~:

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐☒	Smaller Reporting Company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of Registrant’s Common Stock, par value $1.00 as of ~~December 12, 2018~~September 11, 2019 – ~~8,729,682~~9,040,969

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

TABLE OF CONTENTS

Part I. Financial Information:	Page No.

Item 1 - Financial Statements:

Condensed Consolidated Balance Sheets – ~~October~~July 31, ~~2018~~2019 (unaudited) and April 30, ~~2018~~2019	3

Condensed Consolidated Statements of Operations and Comprehensive ~~(Loss) Income Six~~Loss Three Months Ended ~~October~~July 31, ~~2018~~2019 and ~~2017~~2018 (unaudited)	4

Condensed Consolidated Statements of ~~Operations and Comprehensive (Loss) Income~~Cash Flows Three Months Ended ~~October~~July 31, ~~2018~~2019 and ~~2017~~2018 (unaudited)	5

Condensed Consolidated Statements of ~~Cash Flows Six~~Changes in Stockholders’ Equity Three Months Ended ~~October~~July 31, ~~2018~~2019 and ~~2017~~2018 (unaudited)	6

~~Condensed Consolidated Statements of Changes in Stockholders’ Equity Six Months Ended October 31, 2018 (unaudited)~~	7

Notes to Condensed Consolidated Financial Statements (unaudited)	~~8-19~~7-13

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~20-26~~14-18

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	2619

Item 4 - Controls and Procedures	2619

Part II. Other Information:

Item 6 - Exhibits	2720

Signatures	2821

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except par value)

	October 31,			April 30,			July 31,			April 30,
	2018			2018			2019			2019
	(UNAUDITED)						(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents	$	3,911		$	7,869		$	2,239		$	3,683
Marketable securities		7,341			6,149			9,016			8,199
Accounts receivable, net of allowance for doubtful accounts of $173 at October 31, 2018 and $181 at April 30, 2018		6,110			4,268
Accounts receivable, net of allowance for doubtful accounts of $182 at July 31, 2019 and $183 at April 30, 2019								7,328			6,362
Costs and estimated earnings in excess of billings, net		7,047			5,094			7,204			6,670
Inventories, net		25,648			26,186			23,201			23,356
Prepaid income taxes		622			1,459			326			499
Prepaid expenses and other		1,001			1,050			2,223			2,583
Current assets held for sale								-			1,347
Total current assets		51,680			52,075			51,537			52,699
Property, plant and equipment, at cost, net of accumulated depreciation and amortization		13,486			14,127			13,151			13,038
Goodwill and other intangible assets		617			617
Goodwill								617			617
Cash surrender value of life insurance and cash held in trust		14,251			13,915			14,466			14,292
Right-of-Use assets								11,840			-
Other assets		3,628			2,850			3,553			5,923
Non-current assets held for sale								-			202
Total assets	$	83,662		$	83,584		$	95,164		$	86,771

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable - trade	$	1,073		$	1,841
Accounts payable – trade							$	1,061		$	1,188
Accrued liabilities		3,179			3,416			3,600			3,571
Lease liability, current								1,883			-
Current liabilities held for sale								-			1,078
Total current liabilities		4,252			5,257			6,544			5,837

Deferred compensation		13,707			13,541			14,296			14,216
Deferred rent and other liabilities		1,479			1,524
Lease liability								10,193			-
Other liabilities								1,295			1,376
Non-current liabilities held for sale								-			2,253
Total liabilities		19,438			20,322			32,328			23,682
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $1.00 par value authorized 600 shares, no shares issued		-			-
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued, 8,909 shares outstanding at October 31, 2018; 8,867 shares outstanding at April 30, 2018		9,164			9,164
Preferred stock - $1.00 par value; authorized 600 shares, no shares issued								-			-
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued, 9,033 shares outstanding at July 31, 2019; 8,980 shares outstanding at April 30, 2019								9,164			9,164
Additional paid-in capital		56,710			56,439			56,796			56,831
Retained earnings (accumulated deficit)		572			(65	)
Common stock reacquired and held in treasury - at cost (255 shares at October 31, 2018 and 297 shares at April 30, 2018)		(1,168	)		(1,361	)
Accumulated deficit								(2,702	)		(2,111	)
								63,258			63,884
Common stock reacquired and held in treasury - at cost (131 shares at July 31, 2019 and 184 shares at April 30, 2019)								(602	)		(841	)
Accumulated other comprehensive income		(1,054	)		(915	)		180			46
Total stockholders’ equity		64,224			63,262			62,836			63,089
Total liabilities and stockholders’ equity	$	83,662		$	83,584		$	95,164		$	86,771

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive ~~(Loss) Income~~Loss

~~Six~~Three Months Ended ~~October~~July 31,

(In thousands except per share data)

(Unaudited)

2018

2017

Condensed Consolidated Statements of Operations

Revenues
$ 23,153 $ 21,360
Cost of revenues
14,860 14,636
Gross margin
8,293 6,724
Selling and administrative expenses
5,182 5,046
Research and development expense
3,257 3,364
Operating loss
(146
)
(1,686
)

Other income (expense):

Investment income
189 1,167
Interest expense
(34
)
(41
)
Other income, net
121 3
Income (loss) before provision for income taxes
130 (557
)
Benefit for income taxes
(23
)
(98
)
Net income (loss) from continuing operations
153 (459
)
Loss from discontinued operations, net of tax
- (408
)
Net income (loss)
$ 153 $ (867
)

Net income (loss) per common share:

Basic and diluted earnings (loss) from continued operations
$ 0.02 $ (0.05
)
Basic and diluted loss from discontinued operations
$ 0.00 $ (0.05
)
Basic and diluted earnings (loss) per share
$ 0.02 $ (0.10
)

Weighted average shares outstanding:

Basic
8,885 8,830
Diluted
9,046 8,830

Condensed Consolidated Statements of Comprehensive Income (Loss)

Net income (loss)
$ 153 $ (867
)
Other comprehensive (loss) income:

Foreign currency translation adjustment
(82
)
575
Unrealized loss on marketable securities:

Change in market value of marketable securities before
reclassification, net of tax of ($20) in 2017
(55
)
37
Reclassification adjustment for realized gains included in
net income, net of tax of $356 in 2017
(2
)
(691
)
Total unrealized loss on marketable securities, net of tax
(57
)
(654
)

Total other comprehensive loss
(139
)
(79
)
Comprehensive income (loss)
$ 14 $ (946
)

	2019			2018
Condensed Consolidated Statements of Operations
Revenues	$	12,554		$	11,011
Cost of revenues		8,601			6,737
Gross margin		3,953			4,274
Selling and administrative expenses		2,453			2,540
Research and development expense		2,280			1,649
Operating (loss) income		(780	)		85

Other income (expense):
Investment income		177			45
Interest expense		(24	)		(18	)
Other income (expense), net		56			(74	)
(Loss) income before provision for income taxes		(571	)		38
Provision for income taxes		20			7
Net (loss) income	$	(591	)	$	31

Net loss per common share:
Basic	$	(0.07	)	$	0.00
Diluted	$	(0.07	)	$	0.00

Weighted average shares outstanding:
Basic		9,001			8,876
Diluted		9,001			8,990

Condensed Consolidated Statements of Comprehensive Loss
Net (loss) income	$	(591	)	$	31
Other comprehensive loss:
Foreign currency translation adjustment		-			(36	)
Unrealized gain (loss) on marketable securities:
Change in market value of marketable securities before reclassification, net of tax		135			(8	)
Reclassification adjustment for realized gains included in net income, net of tax		(1	)		-
Total unrealized gain (loss) on marketable securities, net of tax		134			(8	)

Total other comprehensive income (loss)		134			(44	)
Comprehensive loss	$	(457	)	$	(13	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of ~~Operations and Comprehensive Income (Loss)~~Cash Flows

Three Months Ended ~~October~~July 31,

(In ~~thousands except per share data)~~thousands)

(Unaudited)

2018

2017

Condensed Consolidated Statements of Operations

Revenues
$ 12,142 $ 9,337
Cost of revenues
8,123 7,134
Gross margin
4,019 2,203
Selling and administrative expenses
2,642 2,335
Research and development expense
1,607 1,734
Operating loss
(230
)
(1,866
)

Other income (expense):

Investment income
144 13
Interest expense
(17
)
(21
)
Other income, net
195 1
Income (loss) before provision for income taxes
92 (1,873
)
Benefit for income taxes
(30
)
(584
)
Net income (loss) from continuing operations
122 (1,289
)
Loss from discontinued operations, net of tax
- (192
)
Net income (loss)
$ 122 $ (1,481
)

Net income per common share:

Basic and diluted earnings (loss) from continued operations
$ 0.01 $ (0.15
)
Basic and diluted loss from discontinued operations
$ 0.00 $ (0.02
)
Basic and diluted earnings (loss) per share
$ 0.01 $ (0.17
)

Weighted average shares outstanding:

Basic
8,893 8,835
Diluted
9,102 8,835

Condensed Consolidated Statements of Comprehensive Income (Loss)

Net income
$ 122 $ (1,481
)
Other comprehensive (loss) income:

Foreign currency translation adjustment
(46
)
260
Unrealized loss on marketable securities:

Change in market value of marketable securities before
reclassification, net of tax of ($2) in 2017
(47
)
3
Reclassification adjustment for realized gains included in
net income, net of tax of $1 in 2017
(2
)
(2
)
Total unrealized loss gain on marketable securities, net of tax
(49
)
1

Total other comprehensive (loss) income
(95
)
261
Comprehensive income (loss)
$ 27 $ (1,220
)

	2019			2018
Cash flows from operating activities:
Net (loss) income	$	(591	)	$	31
Non-cash charges to earnings		2,506			1,151
Net changes in operating assets and liabilities		(1,762	)		(4,743	)
Net cash provided by (used in) operating activities		153			(3,561	)

Cash flows from investing activities:
Proceeds on redemption of marketable securities		750			595
Purchase of marketable securities		(1,435	)		(1,636	)
Purchase of fixed assets and other assets		(912	)		(483	)
Net cash used in investing activities		(1,597	)		(1,524	)

Net cash provided by financing activities		-			-

Net decrease in cash and cash equivalents before effect of exchange rate changes		(1,444	)		(5,085	)

Effect of exchange rate changes on cash and cash equivalents		-			(163	)

Net decrease in cash and cash equivalents		(1,444	)		(5,248	)

Cash and cash equivalents at beginning of period		3,683			7,869

Cash and cash equivalents at end of period	$	2,239		$	2,621



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	24		$	18
Income taxes	$	-		$	-

See accompanying notes to condensed consolidated financial statements.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Condensed Consolidated Statements of Cash Flows~~

~~Six Months Ended October 31,~~

~~(In thousands)~~

~~(Unaudited)~~

2018

2017

Cash flows from operating activities:

Net income (loss) from continuing operations
$ 153 $ (459
)
Net loss from discontinued operations
- (408
)
Net income (loss)
153 (867
)
Non-cash charges to earnings
2,158 1,451
Net changes in operating assets and liabilities
(3,411
)
1,631
Cash (used in) provided by operating activities – continuing operations
(1,100
)
2,215
Cash provided by operating activities – discontinued operations
- 614
Net cash (used in) provided by operating activities
(1,100
)
2,829

Cash flows from investing activities:

Proceeds on redemption of marketable securities
947 6,477
Purchase of marketable securities
(2,206
)
-
Purchase of fixed assets and other assets
(1,337
)
(883
)
Cash (used in) provided by investing activities – continuing operations
(2,596
)
5,594
Cash used in investing activities – discontinued operations
- (28
)
Net cash (used in) provided by investing activities
(2,596
)
5,566

Cash flows from financing activities:

Tax benefit from exercise of stock-based compensation
- 1
Net cash provided by financing activities
- 1

Net (decrease) increase in cash and cash equivalents before effect of exchange rate changes
(3,696
)
8,396

Effect of exchange rate changes on cash and cash equivalents
(262
)
675

Net (decrease) increase in cash and cash equivalents
(3,958
)
9,071

Cash and cash equivalents at beginning of period
7,869 2,738

Cash and cash equivalents at end of period
3,911 11,809

Less cash and equivalents of discontinued operations at end of period
- 794

Cash and cash equivalents of continuing operations at end of period
$ 3,911 $ 11,015

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest
$ 34 $ 41
Income Taxes
$ - $ 325

~~See accompanying notes to condensed consolidated financial statements.~~

Table of Contents

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

~~Six~~Three Months Ended ~~October~~July 31, 2019 and July 31, 2018

(In ~~thousands)~~thousands except per share data)

(Unaudited)

					Additional			(Accumulated Deficit)			Treasury stock						Accumulated other										Additional		(Accumulated Deficit)			Treasury stock						Accumulated other
	Common Stock				paid in			Retained			(at cost)						comprehensive						Common Stock				paid in		Retained			(at cost)						comprehensive
	Shares		Amount		capital			earnings			Shares			Amount			Income (loss)			Total			Shares		Amount		capital		earnings			Shares			Amount			Income (loss)			Total
Balance at April 30, 2018		9,163,940	$	9,164	$	56,439		$	(65	)		297,083		$	(1,361	)	$	(915	)	$	63,262			9,163,940	$	9,164	$	56,439	$	(65	)		297,083		$	(1,361	)	$	(915	)	$	63,262
Opening BS adjustment for adoption of ASU 2014-09									484												484
Opening adjustment for adoption of ASU 2014-09																														483												483
Adjusted balance at May 1, 2018		9,163,940		9,164		56,439			419			297,083			(1,361	)		(915	)		63,746			9,163,940		9,164		56,439		418			297,083			(1,361	)		(915	)		63,745
Contribution of stock to 401(k) plan						50						(14,339	)		66						116							50					(14,339	)		66						116
Stock-based compensation expense						121															121							121														121
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price						-						-			-						-
Other comprehensive income, net of tax																		(44	)		(44	)
Other comprehensive loss, net of tax																																							(44	)		(44	)
Net income									31												31									31												31
Balance at July 31, 2018		9,163,940		9,164		56,610			450			282,744			(1,295	)		(959	)		63,970			9,163,940	$	9,164	$	56,610	$	449			282,744		$	(1,295	)	$	(959	)	$	63,969
Contribution of stock to 401(k) plan						58						(10,089	)		46						104
Stock-based compensation expense						123															123
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price						(81	)					(17,708	)		81						-
Other comprehensive income, net of tax																		(95	)		(95	)
Net income									122												122
Balance at October 31, 2018		9,163,940	$	9,164	$	56,710		$	572			254,947		$	(1,168	)	$	(1,054	)	$	64,224

					Additional			(Accumulated Deficit)			Treasury stock						Accumulated other
	Common Stock				paid in			Retained			(at cost)						comprehensive
	Shares		Amount		capital			earnings			Shares			Amount			Income		Total
Balance at April 30, 2019		9,163,940	$	9,164	$	56,831		$	(2,111	)		183,661		$	(841	)	$	46	$	63,089
Contribution of stock to 401(k) plan						74						(10,906	)		50					124
Stock-based compensation expense						80														80
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price						(189	)					(41,325	)		189					-
Other comprehensive income, net of tax																		134		134
Net loss									(591	)										(591	)
Balance at July 31, 2019		9,163,940	$	9,164	$	56,796		$	(2,702	)		131,430		$	(602	)	$	180	$	62,836

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of ~~October~~July 31, ~~2018~~2019 and the results of its operations and cash flows for the ~~six and~~ three months ended ~~October~~July 31, ~~2018~~2019 and ~~2017.~~July 31, 2018. The April 30, ~~2018~~2019 condensed consolidated balance sheet was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“(‘U.S. GAAP”) have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended April 30, ~~2018,~~2019, filed on July ~~30, 2018,~~26, 2019 with the Securities and Exchange Commission, and the financial statements and notes thereto. The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.

NOTE B – ~~DISCONTINUED OPERATIONS~~

In April 2017, the Company decided to sell its Gillam business as soon as practicable. Accordingly, the Company determined that the assets and liabilities of this reportable segment met the discontinued operations criteria as defined in U.S. GAAP in the quarter ended April 30, 2017. On April 26, 2018, the Company sold Gillam to a European entity in a stock purchase agreement for $1.0 million in cash, which was received on April 27, 2018, and a note payable in three years for an additional $1.0 million. The loss recorded due to the sale of Gillam was approximately $359,000, which represented the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining Gillam equity value reduced by the cash received and the value of the note receivable. As such Gillam’s results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal 2018.

~~Summarized operating results for the Gillam discontinued operations, for the six and three months ended October 31, 2017 were as follows:~~

Periods ended October 31, 2017

Six months

Three months

(UNAUDITED)

(UNAUDITED)

(In thousands)

Revenues
$ 1,955 $ 943
Cost of Revenues
1,390 674
Gross Margin
565 269
Selling and administrative expenses
703 346
Research and development expenses
268 118
Operating Loss
(406
)
(195
)
Other income (expense):

Investment (loss) income

Other income (expense), net
(3 ) (2
)
Loss before provision for income taxes
(409 ) (197
)
Benefit for income taxes
1 5
Net Loss
$ (408
)
$ (192
)

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~NOTE C –~~ EARNINGS PER SHARE

Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share were as follows:

	Periods ended October 31,
	Six months				Three months				Three months ended July 31,
	2018		2017		2018		2017		2019		2018
Weighted average shares outstanding:
Basic		8,884,810		8,830,486		8,893,203		8,834,945		9,001,324		8,876,416
Effect of dilutive securities		161,028		**		208,836		**		**		114,055
Diluted		9,045,838		8,830,486		9,102,039		8,834,945		9,001,324		8,990,471

**** For the ~~six and three month periods~~three-month period ended ~~October~~July 31, ~~2017,~~2019, dilutive securities are excluded since the inclusion of such shares would be antidilutive due to the net loss for the ~~periods.~~period. The exercisable shares excluded as of July 31, 2019 are ~~1,353,750.~~179,000 options. The effect of dilutive securities ~~for the periods~~ would have been ~~129,245 and 117,209, respectively.~~

~~The computation of diluted Earnings Per Share~~250,101 options, for the ~~six and three months ending October~~three-month period ended July 31, 2018 and 2017 excludes those options and stock appreciation rights (“SARS”) with an exercise price in excess of the average market price of the Company’s common shares during the periods presented. The inclusion of such options and SARS in the computation of earnings per share would have been antidilutive. The number of excluded options and SARS were:2019.

Periods ended October 31,

Six months

Three months

2018

2017

2018

2017

Outstanding options and SARS excluded
968,500 ** 780,000 **

NOTE DC – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET

At ~~October~~July 31, ~~2018~~2019 and April 30, ~~2018,~~2019, costs and estimated earnings in excess of billings, net, consisted of the following:

	October 31, 2018			April 30, 2018			July 31, 2019			April 30, 2019
	(In thousands)						(In thousands)
Costs and estimated earnings in excess of billings	$	8,433		$	5,266		$	9,464		$	8,278
Billings in excess of costs and estimated earnings		(1,386	)		(172	)		(2,260	)		(1,608	)
Net asset	$	7,047		$	5,094		$	7,204		$	6,670

Such amounts represent revenue recognized on long-term contracts that had not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms, whereas the related revenue is recognized on the percentage of completion (“POC”) basis at the measurement date. ~~For the most part,~~In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet date. Revenue on these long-term contracts is accounted for on ~~a percentage of completion~~the POC basis. During the ~~six and~~ three months ended ~~October~~July 31, 2019 and 2018, revenue recognized under ~~percentage of completion~~POC contracts was approximately ~~$20.4~~$11.5 million and ~~$11.2 million, respectively. During the six and three months ended October 31, 2017, such revenue was approximately $10.9 million and $4.5~~$9.3 million, respectively. If contract losses are anticipated, costs and estimated earnings in excess of billings are reduced for the full amount of such losses when they are determinable. Contract losses of approximately $314,000 were recorded for the three months ended July 31, 2019.

NOTE ED – TREASURY STOCK TRANSACTIONS

During ~~six and~~the three ~~months~~month period ended ~~October~~July 31, ~~2018,~~2019, the Company made contributions of ~~24,428 shares and 10,089~~10,906 shares of its common stock held in treasury to the Company’s ~~profit sharing~~profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE FE – INVENTORIES

Inventories, which are reported at the lower of cost orand net realizable value, consisted of the following:

	October 31, 2018		April 30, 2018		July 31, 2019		April 30, 2019
	(In thousands)				(In thousands)
Raw Materials and Component Parts	$	13,618	$	16,206	$	15,364	$	11,600
Work in Progress		9,840		8,216		6,445		8,896
Finished Goods		2,190		1,764		1,392		2,860
	$	25,648	$	26,186	$	23,201	$	23,356

AsThe amounts above are net of ~~October~~reserves of $7.2 million and $6.6 million as of July 31, ~~2018~~2019 and April 30, ~~2018, approximately $24.9 million~~2019, respectively. As of July 31, 2019 and ~~$25.2 million, respectively, of total~~April 30, 2019, all inventory was located in the United ~~States~~States.

NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

The Company’s leases primarily represent offices, warehouses, vehicles, and ~~$0.8 million~~manufacturing and ~~$1.0 million, respectively,~~research and development facilities which expire at various times through 2029 and are generally operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. Right-of-use (“ROU”) assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.

The Company elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the balance sheet.

Effective May 1, 2019, the Company adopted ASU 2016-02. The table below presents ROU assets and liabilities recorded on the unaudited condensed consolidated balance sheet related to ASU 2016-02 as follows:

	Classification	July 31, 2019
		(in thousands)
Assets
Operating lease ROU assets	Right-of-Use assets	$	11,840

Liabilities
Operating lease liabilities (short-term)	Lease liability, current		1,883
Operating lease liabilities (long-term)	Lease liability		10,193
Total lease liabilities		$	12,076

Total operating lease expense was ~~located~~$504,000 for the three months ended July 31, 2019, the majority of which is included in ~~China.~~cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statement of operations. There were no new leases entered into for the current period ended July 31, 2019. Net non-cash operating activities related to leases was approximately $236,000 for the three months ended July 31, 2019.

As previously disclosed in our April 30, 2019 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows (in thousands):

For the years ending April 30,	Operating Leases
2020	$	1,316
2021		1,521
2022		1,436
2023		1,469
2024		1,502
Thereafter		6,349
Total future minimum lease payments	$	13,593

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of July 31, 2019:

Fiscal Year Ending April 30,
(in thousands)

Remainder of 2020	$	1,304
2021		1,919
2022		1,783
2023		1,801
2024		1,834
Thereafter		7,215
Total lease payments		15,856
Less imputed interest		(3,780	)
Present value of future lease payments		12,076
Less current obligations under leases		1,883
Long-term lease obligations		10,193

As of July 31, 2019, the weighted-average remaining lease term for all operating leases was 8.9 years. The Company does not generally have access to the rate implicit in the leases and therefore utilized the Company’s borrowing rate as the discount rate. The weighted average discount rate for operating leases as of July 31, 2019 was 6.16%.

NOTE G – SEGMENT INFORMATION

The Company operates under two reportable segments based on the geographic locations of its subsidiaries:

(1)

FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal ~~markets - communication~~markets: satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations; and other components and systems for the U.S. military.

The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiaries, FEI-Elcom and FEI-Asia. FEI-Asia functions as a manufacturing facility for the FEI-NY segment with historically minimal sales to outside customers. In fiscal 2015 and 2016, they had higher sales to outside customers, producing product to third parties as a contract manufacturer.subsidiary, FEI-Elcom. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s satellite business.

(2)

FEI-Zyfer – operates out of California and its products incorporate ~~time and frequency distribution~~Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both ~~governmental~~government and ~~commercial.~~ commercial, and other locator applications. FEI-Zyfer’s products also incorporate precision time references for terrestrial secure communications and command and control, and frequency products that incorporate GPS. FEI-Zyfer’s GPS capability complements the Company’s existing technologies and permits the combined entities to provide a broader range of embedded systems for a variety of timing functions and anti-spoofing (“SAASM”) applications.

The ~~Company’s management~~Company measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of ~~products,~~ customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.

The accounting policies of the two segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended April 30, 2019, filed on July 26, 2019 with the Securities and Exchange Commission. The Company evaluates the performance of its segments and allocates resources to them based on operating profit which is defined as income before investment income, interest expense and taxes. All acquired assets, including intangible assets, are included in the assets of both reporting segments.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the ~~statement~~condensed consolidated statements of operations or the condensed consolidated balance ~~sheet~~sheets for each of the periods (in thousands):

	Periods ended October 31,
	Six months						Three months						Three months ended July 31,
	2018			2017			2018			2017			2019			2018
Revenues:
FEI-NY	$	18,322		$	15,740		$	9,745		$	6,579		$	9,010		$	8,577
FEI-Zyfer		5,103			7,865			2,542			3,593			3,701			2,561
less intersegment revenues		(272	)		(2,245	)		(145	)		(835	)
less intercompany revenues														(157	)		(127	)
Consolidated revenues	$	23,153		$	21,360		$	12,142		$	9,337		$	12,554		$	11,011

Operating loss:
Operating (loss) profit:
FEI-NY	$	(402	)	$	(2,758	)	$	(185	)	$	(2,358	)	$	(1,232	)	$	(215	)
FEI-Zyfer		458			1,275			72			584			517			386
Corporate		(202	)		(203	)		(117	)		(92	)		(65	)		(86	)
Consolidated operating loss	$	(146	)	$	(1,686	)	$	(230	)	$	(1,866	)
Consolidated operating (loss) profit													$	(780	)	$	85

	October 31, 2018			April 30, 2018			July 31, 2019			April 30, 2019
Identifiable assets:
FEI-NY (approximately $1.3 and $1.7 million in China in fiscal years 2019 and 2018, respectively)	$	56,634		$	55,181
FEI-NY (approximately $1.5 million in China as of the fiscal year ended April 30, 2019)							$	51,621		$	54,295
FEI-Zyfer		8,885			8,168			12,824			10,478
less intersegment balances		(11,334	)		(11,888	)		(8,586	)		(8,346	)
Corporate		29,477			32,123			39,305			30,344
Consolidated identifiable assets	$	83,662		$	83,584		$	95,164		$	86,771

Total revenue related to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”) and recognized over time as POC and Passage of Title (“POT”) were approximately $11.5 million and $1.1 million, respectively, of the $12.6 million reported for the three months ended July 31, 2019. The amounts recognized over time as POC and POT were approximately $9.2 million and $1.8 million of the $11.0 million reported for the three months ended July 31, 2018. The amounts by segment and product line were as follows:

	Three Months Ended July 31, 2019								Three Months Ended July 31, 2018
	(In thousands)								(In thousands)
	POC Revenue		POT Revenue			Total Revenue			POC Revenue			POT Revenue			Total Revenue
FEI-NY	$	8,160	$	850		$	9,010		$	8,079		$	498		$	8,577
FEI-Zyfer		3,323		378			3,701			1,175			1,386			2,561
Intersegment		26		(183	)		(157	)		(7	)		(120	)		(127	)
Revenue	$	11,509	$	1,045		$	12,554		$	9,247		$	1,764		$	11,011

	Three Months Ended July 31,
	2019		2018
	(In thousands)
Revenue by Product Line:
Satellite Revenue	$	3,895	$	5,534
Government Non-Space Revenue		6,744		4,781
Other Commercial & Industrial Revenue		1,915		696
Consolidated revenues	$	12,554	$	11,011

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE H – INVESTMENT IN MORION, INC.

The Company has an investment in Morion, Inc., (“Morion”), a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on athe cost basis. This investment is included in other assets in the accompanying condensed consolidated balance sheets. During the ~~six~~three months ended ~~October~~July 31, ~~2018~~2019 and ~~2017,~~2018, the Company acquired product from Morion in the aggregate amount of approximately ~~$145,000~~$245,000 and ~~$170,000,~~$68,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately ~~$2,000~~$47,000 and ~~$182,000,~~$2,000, respectively, included in revenues in the statement of operations as part of the FEI-NY segment. During the three months ended October 31, 2018 and 2017, the Company acquired product from Morion in the aggregate amount of approximately $78,000 and $106,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $2,000 and $182,000, respectively, included in revenues in the statementcondensed consolidated statements of operations as part of the FEI-NY segment. At ~~October~~July 31, ~~2018,~~2019 there was approximately ~~$5,000 was~~$54,000 payable to ~~Morion. At October 31, 2017 there were no payables to Morion. At October 31, 2018~~Morion, up from approximately $38,000 at April 30, 2019, and ~~2017,~~ there were no receivables related to ~~Morion.~~Morion for either period. During the ~~six~~three months ended ~~October~~July 31, ~~2018 and 2017,~~2019, the Company received a dividend from Morion in the amount of approximately ~~$105,000 and $51,000, respectively,~~$125,000, which is included in other income, net in the ~~statement~~condensed consolidated statements of operations as part of the FEI-NY segment.

Morion operates as a subsidiary of Gazprombank, a state-owned Russian bank. On July 16, 2014, after the Company’s investment in Morion, Gazprombank became subject to the ~~U. S.~~U.S. Department of Treasury’s prohibition against ~~U. S.~~U.S. persons from providing it with new financing.

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~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS

The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale securities at ~~October~~July 31, ~~2018~~2019 and April 30, ~~2018,~~2019, respectively, were as follows (in thousands):

October 31, 2018

Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Market Value

Fixed income securities

$
7,522

$
3

$
(184
)

$
7,341

	July 31, 2019
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Fixed income securities	$	8,836	$	182	$	(2	)	$	9,016

April 30, 2018

Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Market Value

Fixed income securities

$
6,274

$
10

$
(135
)

$
6,149

	April 30, 2019
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Fixed income securities	$	8,152	$	71	$	(24	)	$	8,199

The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	Less than 12 months					12 Months or more				Total					Less than 12 months					12 Months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
October 31, 2018
July 31, 2019
Fixed Income Securities	$	6,023	$	(177	)	$	-	$	-	$	6,023	$	(177	)	$	250	$	(0	)	$	861	$	(2	)	$	1,111	$	(2	)
April 30, 2018

April 30, 2019
Fixed Income Securities	$	5,334	$	(135	)	$	-	$	-	$	5,334	$	(135	)	$	995	$	(4	)	$	3,349	$	(20	)	$	4,344	$	(24	)

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at ~~October~~July 31, ~~2018~~2019 were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations, and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.

During the ~~six and~~ three months ended ~~October~~July 31, ~~2018,~~2019, the Company sold or redeemed available-for-sale securities ~~in the amounts~~ of ~~$947,110 and $325,110, respectively,~~approximately $750,000, realizing gains of approximately $2,000 in both periods. During the six and three months ended October 31, 2017, the Company sold or redeemed available-for-sale securities in the amount $6.5 million and $204,000, respectively, realizing gains of approximately $1.0 million and $4,000, respectively.$1,000.

~~Maturities of fixed income securities classified as available-for-sale at October 31, 2018 were as follows (at cost, in thousands):~~

Current
$ 1,114
Due after one year through five years
2,898
Due after five years through ten years
3,510
$ 7,522

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Maturities of fixed income securities classified as available-for-sale at July 31, 2019 were as follows, at cost (in thousands):

Current	$	2,403
Due after one year through five years		3,981
Due after five years through ten years		2,701
	$	9,085

The fair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The levels of the fair value hierarchy are described below:

	Level 1	Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2	Inputs to the valuation methodology include: -Quoted prices for similar assets or liabilities in active markets; -Quoted prices for identical or similar assets or liabilities in inactive markets; -Inputs other than quoted prices that are observable for the asset or liability; and -Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. All of the Company’s investments in marketable securities are valued on a Level 1 basis.

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

In ~~January 2017,~~August 2018, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on its financial statements when adopted in fiscal year 2021.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04 goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company will not be adopting ASU 2017-04 ~~early. Although the Company~~early, and is ~~still~~ in the process of determining the effect that ASU 2017-04 may ~~have, it~~have. However, the Company expects the new standard ~~will likely not~~to have ~~a material~~an immaterial effect on its financial ~~statements when adopted in fiscal 2021.~~statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on ~~the~~its financial statements when adopted in fiscal ~~2021.~~

~~In February 2016, the FASB issued ASU No. 2016-02~~ ~~Leases (Topic 842~~) (“ASU 2016-02”). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amendments of ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company does not intend to adopt this update early and is currently re-evaluating the impact of this standard on its consolidated financial statements, due to the new lease amendment dated July 25, 2018, for the Company’s headquarters in New York, and expects that adoption will materially increase our assets and liabilities on the consolidated financial statements related to recording right-of-use assets and corresponding lease liabilities when adopted beginning in fiscal 2020.

~~In August 2018, the FASB issued ASU No. 2018-13~~ ~~Fair Value Measurement (Topic 820)~~ (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on the financial statements when adopted in fiscalyear 2021.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Newly Adopted Accounting Standards

~~Revenue from Contracts with Customers~~Leases (Topic 842)

In ~~May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ (“ASU 2014-09”), as amended, which establishes new guidance for revenue recognition. ASU 2014-09 eliminates most of the existing industry-specific revenue recognition guidance and significantly expands related disclosures. Additionally, it supersedes some cost guidance in Subtopic 605-35, ~~Revenue Recognition-Construction-Type and Production-Type Contracts~~~~, and creates a new Subtopic 340-40,~~ ~~Other Assets and Deferred Costs-Contracts with Customers~~. The Company determines revenue recognition through the following steps: identification of the contract, or contracts, with the customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognize revenue when, or as, the entity satisfies a performance obligation. The core principle of the guidance is that the Company will recognize revenue upon the transfer of the promised goods and services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The new guidance requires significant additional judgement and estimation (as compared to the previous guidance) that may include, but is not limited to, identifying performance obligations and estimating the amount of variable consideration, if any, to include in the transaction price, and allocation of the transaction price to the performance obligations. The new standard allows for two methods of adoption, either by (i) retrospectively to each prior reporting period presented (“full retrospective method”) or (ii) retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (“modified-retrospective method”). The Company adopted ASU 2014-09 in the first quarter of fiscal 2019 using the modified-retrospective method, which resulted in a cumulative effect increase of $484,000, including the adoption of ASC 340-40 as noted below, as of the date of adoption on May 1, 2018, to retained earnings. The adoption of ASU 2014-09 effected all new and open contracts as of the adoption date.

~~In connection with the adoption of Topic 606 on May 1, 2018,~~2020 the Company ~~also~~ adopted ~~the guidance in ASC 340-40,~~ASU No. 2016-02 ~~Other Assets and Deferred Costs - Contracts with Customers~~Leases (Topic 842) (“~~ASC 340-40”~~ASU 2016-02”)~~, with respect to capitalization~~ and amortization of incremental costs of obtaining a contract. The new cost guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. The Company expects that sales commissions as a result of obtaining customer contracts are recoverable, and therefore the Company defers and capitalizes them as contract costs. As a result of this new guidance, the Company capitalizes sales commissions for which the expected amortization period is greater than one year. The Company classifies the unamortized portion of deferred commissions as current or noncurrent assets based upon the timing of when the Company expects to recognize the expense. The current and noncurrent portion of deferred commissions are included in prepaid expenses and other current assets, respectively, in the Company’srecognized on its Condensed Consolidated Balance ~~Sheet. Adoption~~Sheets $12.1 million of ~~ASC 340-40 resulted in~~lease liabilities with corresponding ROU assets for operating leases. The Company elected a ~~cumulative effect adjustment of $87,000 to total assets, $109,000 to total liabilities, and a $22,000 reduction to retained earnings, as of the date of adoption, on May 1, 2018.~~

~~The Company’s new accounting policies as a result of adopting ASU 2014-09 are discussed below.~~

~~Revenue Recognition~~

Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include multiple performance obligations which are satisfied either by shipped projects or the completion of milestones as defined in the contract. The transaction price is allocated either (i) based on the sale price of each item shipped or (ii) as defined by the milestones stated in the contract.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the Percentage of Completion (“POC”) method. On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisionsprospective application for the ~~full amount of anticipated losses on contracts are made in the period in which they become determinable.~~

~~On production-type orders, revenue is recorded~~new guidance, as ~~units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs. Changes in job performance on long-term contracts~~permitted under ASU 2016-02, and ~~production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined~~therefore prior periods continue to be ~~required. Provisions for anticipated losses on customer orders are made~~presented in accordance with Topic 840. We also elected the ~~period in~~package of practical expedients, which ~~they become determinable.~~

~~For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales~~among other things, does not require reassessment of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.

In connection with the adoption of Topic 606, there were changes to the timing of the Company’s revenue recognition associated with the significant portion of our business that was not being accounted for as percentage of completion in prior years for contracts where the end customer was the U.S. Government. These production-type contracts under which revenue was previously recorded as Passage of Title (“POT”) are currently being recognized as POC following adoption of this ASU. As a result, the Company will begin recognizing revenue earlier under these contracts. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.

Significant judgment is used in evaluating the financial information for certain contracts related to the adoption of this ASU to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.

~~Practical Expedients~~

~~The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.~~

The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~Disaggregation of Revenue~~

Total revenue related to the adoption ASU 2014-09 and recognized over time as POC was approximately $20.4 million of the $23.2 million reported for the six months ended October 31, 2018, and $11.2 million of the $12.1 million reported for the three months ended October 31, 2018. The amounts by segment and product line are as follows:

Six Months Ended October 31, 2018

(In thousands)

POC Revenue

POT Revenue

Total Revenue

FEI-NY
$ 17,199 $ 1,123 $ 18,322
FEI-Zyfer
3,233 1,870 5,103
Intersegment
(36
)
(236
)
(272
)
Revenue
$ 20,396 $ 2,757 $ 23,153

Three Months Ended October 31, 2018

(In thousands)

POC Revenue

POT Revenue

Total Revenue

FEI-NY
$ 9,120 $ 625 $ 9,745
FEI-Zyfer
2,058 484 2,542
Intersegment
(30
)
(115
)
(145
)
Revenue
$ 11,148 $ 994 $ 12,142

Periods ended October 31,

Six months

Three months

2018

2017

2018

2017

(In thousands)

Revenue by Product Line:

Satellite Revenue
$ 11,302 $ 8,998 $ 5,768 $ 3,799
Government Non-Space Revenue
10,420 7,706 5,639 3,158
Other Commercial & Industrial Revenue
1,431 4,656 735 2,380
Consolidated revenues
$ 23,153 $ 21,360 $ 12,142 $ 9,337

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~The cumulative effect of changes made to the Condensed Consolidated Balance Sheet as of May 1, 2018 was as follows (in thousands):~~

Balance at
April 30, 2018

Adjustments

Balance at
May 1, 2018

ASSETS

Costs and estimated earnings in excess of billings, net
$ 5,094 $ 1,435
(a)
$ 6,529
Inventories, net
26,186 (929
)
(b)
25,257
Prepaid expenses and other
1,050 77
(c)
1,127
Total current assets
52,075 583 52,658
Other assets
2,850 10
(d)
2,860
Total assets
83,584 593 84,177

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accrued liabilities
$ 3,416 $ 97
(e)
$ 3,513
Total current liabilities
5,257 97 5,354
Deferred rent and other liabilities
1,524 12
(f)
1,536
Total liabilities
20,322 109 20,431
(Accumulated deficit) Retained Earnings
(65
)
484
(g)
419
Total stockholders’ equity
63,262 484 63,746
Total liabilities and stockholders’ equity
83,584 593 84,177

~~Notes:~~

~~(a) Adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606~~

~~(b) Adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606~~

~~(c) Adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40~~

~~(d) Adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40~~

~~(e) Adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40~~

~~(f) Adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40~~

~~(g) The cumulative effect of initially adopting Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the beginning balance of (Accumulated deficit) Retained earnings.~~

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~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~The impact of adopting the standard on the Company’s consolidated financial statements for the six and three months ended October 31, 2018 were as follows (in thousands):~~

~~Condensed Consolidated Balance Sheet~~

As Reported

Adjustments

Balances Without
Adoption of ASU 2014-09

ASSETS

Costs and estimated earnings in excess of billings, net
$ 7,047 $ 3,487
(a)
$ 3,560
Inventories, net
25,648 (1,994
)
(b)
27,642
Prepaid expenses and other
1,001 46
(c)
955
Total current assets
51,680 1,539 50,141
Other assets
3,628 5
(d)
3,623
Total assets
83,662 1,544 82,118

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accrued liabilities
$ 3,179 61
(e)
3,118
Total current liabilities
4,252 61 4,191
Deferred rent and other liabilities
1,479 12
(f)
1,467
Total liabilities
19,438 73 19,365
Retained Earnings (Accumulated deficit)
572 1,471
(g)
(899
)
Total stockholders’ equity
64,224 1,471 62,753
Total liabilities and stockholders’ equity
83,662 1,544 82,118

~~Notes:~~

~~(a) Cumulative adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606~~

~~(b) Cumulative adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606~~

~~(c) Cumulative adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40~~

~~(d) Cumulative adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40~~

~~(e) Cumulative adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40~~

~~(f) Cumulative adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40~~

~~(g) The cumulative effect of initially adopting for Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the balance of Retained earnings (Accumulated deficit).~~

~~Condensed Consolidated Statement of Operations~~

Six Months Ended October 31, 2018:

As Reported

Adjustments

Balances Without
Adoption of
ASU 2014-09

Revenues
$ 23,153 $ 2,052 $ 21,101
Cost of revenues
14,860 1,065 13,795
Gross profit
8,293 989 7,304
Selling and administrative expenses
5,182 0
(a)
5,182
Operating profit (loss)
(146
)
988 (1,134
)
Income (loss) before provision for income taxes
130 988 (858
)
Net income (loss)
153 988 (835
)

~~Note:~~

~~(a) Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40~~

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

Three Months Ended October 31, 2018:

As Reported

Adjustments

Balances Without
Adoption of
ASU 2014-09

Revenues
$ 12,142 $ 1,242 $ 10,900
Cost of revenues
8,123 838 7,285
Gross profit
4,019 403 3,616
Selling and administrative expenses
2,642 (9
)
(a)
2,651
Operating profit (loss)
(230
)
413 (643
)
Income (loss) before provision for income taxes
92 413 (321
)
Net income (loss)
122 413 (291
)

~~Note:~~

~~(a) Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40~~lease classification.

NOTE K – CREDIT FACILITY

On January 30, 2017, the Company repaid the principal balance due on its credit facility, dated June 6, 2013, with JPMorgan Chase Bank, N.A. Subsequently, the Company voluntarily terminated this credit facility with JPMorgan Chase Bank, N.A to reduce the fees and expenses associated with maintaining that facility. The Company did not incur any early termination fees associated with its voluntary termination of this credit facility. If, in the future, the Company determines that it would be beneficial to have a credit facility in place, the Company believes that alternative facilities are available. As of ~~October~~July 31, ~~2018,~~2019, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.

NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. ~~In evaluating our ability to recover~~

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets ~~in the jurisdiction from which they arise, we~~on a jurisdictional basis at each reporting date. We consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. ~~Based on~~Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the ~~weighting~~deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. As of ~~all evidence, both positive~~July 31, 2019, and ~~negative, most notably~~April 30, 2019, the ~~three year cumulative loss, we established~~Company maintained a full valuation allowance against ~~our U.S.~~its deferred tax ~~assets during the quarter ended April 30, 2018.~~assets. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. ~~The Company evaluates the likelihood of realizing its deferred tax assets quarterly.~~

On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA” or the “Tax Act”) was enacted into law. In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, ~~Income Taxes~~ in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

The Company’s accounting for certain elements of the TCJA was incomplete as of April 30, 2018, and remains incomplete as of October 31, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items during the periods ended January 31, 2018 and April 30, 2018. There were no changes to the estimates during the six and three months ended October 31, 2018.

1913

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1933 or the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “objective,” “seek,” “strive,” “might,” “likely result,” “build,” “grow,” “plan,” “goal,” “expand,” “position,” or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. All statements by the Company that address activities, events or developments that the Company expects or anticipates will occur in the future, including all statements by the Company regarding its expected financial position, revenues, cash flows and other operating results, business position, legal proceedings or similar matters, are forward-looking statements. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company’s actual results to differ materially from those expressed in the forward-looking statements referred to above. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and other risks detailed in the Company’s periodic report filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management’s analysis, judgments, belief, or expectation only as of such date. Any and all of the forward-looking statements contained in this Form 10-Q and any other public ~~statement~~statements by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, ~~2018,~~2019, filed on July ~~30, 2018.~~26, 2019 with the Securities and Exchange Commission. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory. Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the ~~net~~ realizable value of its inventory orand the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the ~~six and~~ three months ended ~~October~~July 31, ~~2018,~~2019, except for those impacted by the newly adopted accounting standard ~~below.~~regarding leases.

Revenue Recognition

Revenue is recognized when a performance obligation is satisfied, when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. A performance obligation is a distinct product or service that is transferred to the customer’s control based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The ~~company~~Company derives revenue either as (i) units with specifications and frequencies that can be used by multiple customers (POT) or (ii) units with specific specifications and frequencies that are used by a specific customer or for government end use (POC).

In prior years a significant portion of our business that was not being accounted for as POC was from contracts where the end customer is the U.S. Government. These production-type contracts under which revenue was previously recorded as POT are currently being recognized as POC following adoption of ASU 2014-09 as noted in Note J to the condensed consolidated financial statements in Part I, Item I of this form 10-Q (“Note J”). As a result, the Company will begin recognizing revenue earlier under these contracts.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the POC method. On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin rate (“GM ~~Rate~~Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs. Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on customer orders are made in the period in which they become determinable.

For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer ~~order.~~order which then transfers control of the performance obligation to the customer. When payment is contingent upon customer acceptance of the installed ~~system,~~product, revenue is deferred until such installation completed and acceptance is ~~received and installation completed.~~received.

Costs and Expenses

Contract costs include all direct material costs, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are expensed as incurred, ~~except as otherwise noted in Note J above~~with the exception of sales commissions with an amortization period of greater than one year which are amortized over the length of the contract in relation to the adoption of ASU 2014-09.

Inventory

In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write-downs are established for slow-moving, or obsolete items and costs incurred on programs for which production-level orders cannot be determined as probable. Such write-downs are based upon management’s experience and expectations for future business. Any changes arising from revised expectations are reflected in cost of ~~sales~~revenues in the period the revision is made.

Marketable Securities

All of the Company’s investments in marketable securities are Level 1 securities which trade on public markets and have current prices that are readily available. In general, investments in fixed income securities are ~~only in~~limited to the commercial paper of financially sound corporations or the bonds and shorter-term notes of U.S. Government agencies. Although the value of such investments may fluctuate significantly based on economic factors, the Company’s own financial strength enables it to wait for the securities to either recover their value or to mature such that any interim unrealized gains or losses are deemed to be temporary.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

RESULTS OF OPERATIONS

The table below sets forth for the ~~six and~~ three months ended ~~October~~July 31, 2019 and 2018, ~~and 2017~~respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

	Six months						Three months
	Periods ended October 31,												Three months ended July 31,
	2018			2017			2018			2017			2019			2018
Revenues
FEI-NY		79.1	%		73.7	%		80.3	%		70.5	%		71.8	%		77.9	%
FEI-Zyfer		22.0			36.8			20.9			38.5			29.5			23.3
Less intersegment revenues		(1.1	)		(10.5	)		(1.2	)		(9.0	)		(1.3	)		(1.2	)
		100.0			100.0			100.0			100.0			100.0			100.0
Cost of revenues		64.2			68.5			66.9			76.4			68.5			61.2
Gross margin		35.8			31.5			33.1			23.6			31.5			38.8
Selling and administrative expenses		22.4			23.6			21.8			25.0		19.5				23.1
Research and development expenses		14.1			15.8			13.2			18.6			18.2			15.0
Operating loss		(0.7	)		(7.9	)		(1.9	)		(20.0	)
Other income (loss), net		1.2			5.3			2.7			(0.1	)
Benefit for income taxes		(0.1	)		(0.5	)		(0.2	)		(6.3	)
Income (Loss) from continued operations		0.6			(2.1	)		1.0			(13.8	)
(Loss) from discontinued operations, net of tax		0.0			(1.9	)		0.0			(2.1	)
Net income (loss)		0.6	%		(4.0	)%		1.0	%		(15.9	)%
Operating (loss) income														(6.2	)		0.7
Other income (expense), net														1.7			(0.4	)
Provision for income taxes														0.2			0.1
Net (loss) income														(4.7	)%		0.2	%

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Revenues

	Six months											Three months											Three months ended July 31 (in thousands)
	Periods ended October 31,
Segment	2018			2017			Change					2018			2017			Change					2019			2018			Change
FEI-NY	$	18,322		$	15,740		$	2,582		16.4	%	$	9,745		$	6,579		$	3,166		48.1	%	$	9,010		$	8,577		$	433		5.1	%
FEI-Zyfer		5,103			7,865			(2,762	)	(35.1	)		2,542			3,593			(1,051	)	(29.3	)		3,701			2,561			1,140		44.5
Intersegment revenues		(272	)		(2,245	)		1,973		(87.9	)		(145	)		(835	)		690		(82.6	)		(157	)		(127	)		(30	)	23.6
	$	23,153		$	21,360		$	1,793		8.4	%	$	12,142		$	9,337		$	2,805		30.0	%	$	12,554		$	11,011		$	1,543		14.0	%

For the ~~six~~three months ended ~~October~~July 31, ~~2018,~~2019, revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $2.0 million over the same period of fiscal 2019, and accounted for approximately 54% of consolidated revenues compared to approximately 43% during this same period in fiscal 2019. Revenues from commercial and U.S. Government satellite programs ~~increased~~decreased approximately ~~$2.3~~$1.6 million ~~over~~for the three months ended July 31, 2019, as compared to the same period of ~~the previous~~ fiscal year 2019 and accounted for approximately ~~49%~~31% of consolidated revenues compared to approximately ~~42%~~50% during this same period in fiscal ~~2018.~~2019. The change in revenue is related to product mix and timing of contract awards. Revenues on these contracts are recognized primarily under the POC method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $2.7 million over the same period of fiscal 2018, and accounted for approximately 45% of consolidated revenues compared to approximately 36% during this same period in fiscal 2018. Other commercial and industrial revenues in this fiscal 2019 period accounted for approximately 6% of consolidated revenues compared to 22% in the prior year. Intersegment revenues are eliminated in consolidation.

For the three months ended October 31, 2018 revenues from commercial and U.S. Government satellite programs increased approximately $2.0 million over the same period of fiscal 2018, and accounted for approximately 48% of consolidated revenues compared to approximately 41% during this same period in fiscal 2018. Revenues from non-space U.S. Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $2.5 million over the same period of fiscal 2018, and accounted for approximately 46% of consolidated revenues compared to approximately 34% during this same period in fiscal 2018. Other commercial and industrial revenues for the three months ended ~~October~~July 31, ~~2018 accounted for~~2019 were $1.9 million and represented approximately 6%15% of consolidated revenues compared to ~~26% during this~~$700,000 or 7% in the same period inof the prior year.

Gross Margin

	Three months ended July 31 (in thousands)

	2019			2018			Change
	$	3,953		$	4,274		$	(321	)	(7.5	%)
GM Rate		31.5	%		38.8	%

For the three month period ended July 31, 2019, gross margin and GM Rate decreased as compared to the same period in fiscal 2019. The decrease in gross margin and GM Rate was primarily due to higher engineering costs incurred in several new programs. These programs relate to products that are pushing state of the art technology.

Selling and Administrative Expenses

Three months ended July 31,
(in thousands)
2019		2018		Change
$	2,453	$	2,540	$	(87	)	(3.4	%)

For the three months ended July 31, 2019 and 2018, selling and administrative (“SG&A”) expenses were approximately 20% and 23%, respectively, of consolidated revenues. There was no account or type of expense that represented a significant portion of the change in expenses.

Research and Development Expense

Three months ended July 31,
(in thousands)
2019		2018		Change
$	2,280	$	1,649	$	631	38.3	%

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

~~Gross Margin~~

Six months

Three months

Periods ended October 31,

2018

2017

Change

2018

2017

Change

$ 8,293 $ 6,724 $ 1,569 23.3
%
$ 4,019 $ 2,203 $ 1,816 82.4
%
GM Rate
35.8
%
31.5
%
33.1
%
23.6
%

For the six and three month period ended October 31, 2018 gross margin and GM Rate increased over the same period in fiscal 2018. The increase to both the gross margin and GM Rate was due to increased revenues, lower repair cost and product mix.

~~Selling and Administrative Expenses~~

Six months

Three months

Periods ended October 31,

2018

2017

Change

2018

2017

Change

$ 5,182 $ 5,046 $ 136 2.7
%
$ 2,642 $ 2,335 $ 307 13.2
%

For the six months ended October 31, 2018 and 2017, selling and administrative (“SG&A”) expenses were approximately 22% and 24%, respectively, of consolidated revenues. For the three months periods ended October 31, 2018 and 2017, SG&A expenses were approximately 22% and 25% respectively, of consolidated revenues. The increase in SG&A expenses during the six and three months ended October 31, 2018, as compared to the six and three months ended October 31, 2017, was due to additional personnel related expenses and professional fees, partially offset by reductions in various other SG&A accounts.

~~Research and Development Expense~~

Six months

Three months

Periods ended October 31,

2018

2017

Change

2018

2017

Change

$ 3,257 $ 3,364 $ (107
)
(3.2
)%
$ 1,607 $ 1,734 $ (127
)
(7.3
)%

Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The R&D rate for the ~~six month~~three-month period ending ~~October~~July 31, ~~2018~~2019 was ~~14%~~18% of sales compared to ~~16%~~15% of sales for the same period of the previous fiscal year. The Company expects to maintain a high level of internally funded activity related to R&D ~~rate~~through the balance of the current year and beyond to address new large opportunities in secure communications, command and control applications, next generation satellite payload products and additional DOD and commercial applications.

Operating (Loss) Income

Three months ended July 31,
(in thousands)
2019			2018		Change
$	(780	)	$	85	$	(865	)	NM

The Company’s results for the ~~three month~~three-month period ~~ending October~~ended July 31, ~~2018 was 13%~~2019 reflects improvements in revenues, more than offset by lower gross margin percent and increased R&D costs compared to ~~19% of sales for~~ the same period of ~~the previous~~ fiscal ~~year. Customer funded R&D development recorded in revenues is expected to add substantially to overall R&D activity in the full current fiscal year compared to fiscal 2018.~~

~~Operating Income~~ ~~(Loss)~~

Six months

Three months

Periods ended October 31,

2018

2017

Change

2018

2017

Change

$ (146
)
$ (1,686
)
$ 1,540 (91.3
)%
$ (230
)
$ (1,866
)
$ 1,636 (87.7
)%

The Company had increased revenue, gross margin, and GM Rate in the six and three months ending October 31, 2018 resulting in reduced operating loss as compared to the same periods of the preceding fiscal year.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~2019.

Other Income (Expense)

	Six months											Three months										Three months ended July 31,
	Periods ended October 31,																					(in thousands)
	2018			2017			Change					2018			2017			Change				2019			2018			Change
Investment income	$	189		$	1,167		$	(978	)	(83.8	)%	$	144		$	13		$	131	NM	%	$	177		$	45		$	132		NM
Interest expense		(34	)		(41	)		7		(17.1	)%		(17	)		(21	)		4	(19.0	)%		(24	)		(18	)		(6	)	33.3	%
Other income (expense), net		121			3			118		NM	%		195			-			195	NM	%		56			(74	)		130		NM
	$	276		$	1,129		$	(853	)	(75.6	)%	$	322		$	(8	)	$	330	NM	%	$	209		$	(47	)	$	256		NM

Investment income is derived primarily from the Company’s holdings of marketable securities. Earnings on ~~these~~ securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions or ~~sales~~maturities of securities. InFor the ~~quarter ending~~three-month period ended July 31, ~~2017~~2019 investment income includes a $125,000 dividend from Morion. Other income included the Company divested of all its holdings in equities securities in its investment account, which were converted to cash. As a result, the Company recorded gains of approximately $1.0 million during the six months ended October 31, 2017 as compared to negligible gain or loss in the same period of fiscal 2019. The change in other income (expense) was the result of the proceedssale of a ~~life insurance policy~~fixed asset for a gain of ~~a retired key employee.~~$50,000 for the three-month period ended July 31, 2019.

Income Tax Provision ~~(Benefit)~~

Six months

Three months

Periods ended October 31,

2018

2017

Change

2018

2017

Change

$ (23
)
$ (98
)
$ 75 (76.5
)%
$ (30
)
$ (584
)
$ 554 (94.9
)%
Effective tax rate on pre-tax book income:

(17.7
)%
17.6
%
(32.6
)%
31.2
%

	Three months ended July 31,
	(in thousands)
	2019			2018			Change
	$	20		$	7		$	13	NM
Effective tax rate on pre-tax book income:
		(3.5	)%		18.4	%

~~For~~The estimated annual effective tax rate for the ~~six months ended October~~fiscal year ending April 30, 2020 is 0%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. As of July 31, ~~2018,~~2019, and April 30, 2019, the Company ~~recorded an income~~maintained a full valuation allowance against its deferred tax benefit of $(22,600), which included a discrete income tax provision of $36,700. The calculation of the overall income tax provision for the six months ended October 31, 2018 primarily consisted of foreign taxes and a discrete income tax provision related to the accrual of interest for unrecognized tax benefits. For the six months ended October 31, 2017, the Company recorded an income tax benefit of $(98,000).assets.

For the three months ended ~~October~~July 31, ~~2018,~~2019, the Company recorded ~~an income tax benefit of $(29,700), which included~~ a discrete income tax provision of ~~$18,400. The calculation of the overall income tax provision for the three months ended October 31, 2018~~$20,000, which primarily consisted of ~~foreign taxes and a discrete income tax provision related to the~~an accrual of interest for unrecognized tax benefits. For the three months ended ~~October~~July 31, ~~2017,~~2018, the Company recorded an income tax ~~benefit~~provision of ~~$(584,000).~~$7,000, which included a discrete income tax provision of $18,000.

The effective tax rate for the ~~six~~three months ended ~~October~~July 31, ~~2018 was~~2019 is an income tax ~~benefit~~provision of ~~(17.7)%~~3.5% on a pretax loss of $571,000 compared to an income tax provision of ~~17.6%~~18.4% on pretax income of $38,000 in the comparable prior period. The effective tax rate for the ~~six~~three months ended ~~October~~July 31, ~~2018~~2019 differs from the U.S. statutory rate of 21% primarily due to ~~the mix of domestic and foreign earnings,~~ a discrete income tax provision related to the accrual of interest for unrecognized tax benefits and domestic losses for which the Company is not recognizing an income tax benefit.

The effective tax rate for the three months ended October 31, 2018 was an income tax benefit of (32.6)% compared to an income tax provision of 31.2% in the comparable prior period. The effective rate for the three months ended October 31, 2018 differs from the U.S. statutory rate of 21% primarily due to the mix of domestic and foreign earnings, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

Based on the weighting of all evidence, both positive and negative, most notably the three-year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets during the quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.

2417

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act was enacted into law. In response to the TCJA, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, ~~Income Taxes~~ in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

The Company’s accounting for certain elements of the TCJA was incomplete as of the period ended April 30, 2018, and remains incomplete as of October 31, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items during the periods ended January 31, 2018 and April 30, 2018. There were no changes to the estimates during the six months ended October 31, 2018.

~~Discontinued Operations~~

Six months

Three months

Periods ended October 31,

2018

2017

Change

2018

2017

Change

Net Loss
$ 0 $ (408
)
$ (408
)
100
%
$ 0 $ 192 $ 192 100
%

The above table represents the net loss for the Gillam segment accounted for as discontinued operations as presented in Note B to the condensed consolidated financial statements I Part I, Item 1 of this Form 10-Q. On April 26, 2018, the Company sold Gillam to a European entity, in a stock purchase agreement, for $1.0 million in cash received on April 27, 2018, and a note payable in three years for an additional $1.0 million. The loss recorded due to the sale of Gillam was approximately $359,000. The calculation of the loss was the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining equity amounts of Gillam reduced by the cash received and the value of the note receivable. As such Gillam’s results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal 2018.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s balance sheet continues to reflect a strong working capital position of ~~$47.4~~$44.9 million at ~~October~~July 31, ~~2018~~2019 and ~~$46.8~~$46.9 million at April 30, ~~2018.~~2019. Included in working capital at ~~October~~July 31, ~~2018~~2019 and April 30 ~~2018,~~2019, is $11.3 million and ~~$14.0~~$11.9 million, respectively, consisting of cash, cash equivalents, and ~~short-term investments.~~marketable securities. The Company’s current ratio at ~~October~~July 31, ~~2018 was 12.1~~2019 is 8.5 to 1.

Cash ~~used in operations~~provided by operating activities for the ~~six~~three months ended ~~October~~July 31, ~~2018~~2019 was ~~$1.1 million~~$153,000 compared to ~~$2.8~~$3.6 million ~~provided by~~of cash used in operations in the comparable fiscal ~~2018~~2019 period. The ~~decrease in~~decreased cash flow in the fiscal ~~2019~~2020 period ~~ended October 31, 2018~~ resulted primarily from an increase in accounts ~~receivables and a decrease in accounts payables offset by a decrease in inventory, compared to the balances as of the end of the previous fiscal 2018 period ended October 31, 2017.~~receivable balances. For the ~~six month~~three-month periods ended ~~October~~July 31, ~~2018~~2019 and ~~2017,~~2018, the Company incurred ~~approximately $2.2~~$1.6 million and ~~$1.5~~$1.2 million, respectively, of non-cash operating expenses including right to use asset and liability for leases, depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs.

Net cash used in investing activities for the ~~six~~three months ended ~~October~~July 31, ~~2018,~~2019 was ~~$2.6~~$1.6 million compared to ~~$5.6 million provided by investing activities in~~$1.5 for the ~~same period of fiscal~~three months ended July 31, 2018. During the fiscal ~~2019~~2020 period, marketable securities were sold or redeemed in the amount of ~~$947,000~~$750,000 compared to ~~$6.5 million~~$595,000 of such redemptions during the fiscal ~~2018~~2019 period. For the fiscal ~~2019~~year 2020 period, approximately ~~$2.2~~$1.4 million of marketable securities were ~~purchased. There were no marketable securities~~ purchased compared to $1.6 million for the same period inof fiscal ~~2018. In the six months ended October 31, 2018 and 2017, the~~2019. The Company acquired property, plant and equipment in the amount of approximately ~~$1.3 million~~$912,000 and ~~$883,000,~~$483,000 for the three-month periods ended July 31, 2019 and 2018, respectively. ~~The Company discontinued investing in equity securities in fiscal 2018 as part of its cash management strategy.~~ The Company may continue to invest in cash equivalents as dictated by its investment ~~and acquisition strategies.~~strategy.

There was no cash provided by financing activities for either the ~~six~~three months ended ~~October~~July 31, ~~2018 compared to $1,000 provided in~~2019 or the ~~six~~three months ended ~~October~~July 31, ~~2017.~~

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~2018.

The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock ~~for treasury whenever~~when appropriate opportunities ~~arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future.~~

arise. As of ~~October~~July 31, ~~2018,~~2019, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization. For the ~~six~~three months ended ~~October~~July 31, ~~2018~~2019 and ~~2017,~~2018, there were no repurchases of shares.

The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes will result in future growth and profitability. ~~During fiscal 2018, the~~The Company ~~secured partial~~anticipates securing additional customer funding for a portion of its R&D efforts. The customer funds received in connection therewith appear in revenues and are not included in R&D expenses. For fiscal 2019, the Company has secured significant additional customer funding for its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities as in fiscal ~~year 2018.~~2020. The Company expects internally generated cash will be adequate to fund these ~~development~~R&D efforts. The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.

As of ~~October~~July 31, ~~2018,~~2019, the Company’s consolidated funded backlog was approximately ~~$38~~$35 million compared to ~~$30~~$37 million at April 30, ~~2018,~~2019, the end of fiscal ~~2018.~~2019. Approximately ~~80%~~85% of this backlog is expected to be realized in the next twelve months. ~~Included~~As of July 31, 2019, there are no amounts included in ~~the~~ backlog ~~at October 31, 2018 was approximately $8.5 million~~ under ~~cost-plus-fee contracts.~~cost-plus fixed-fee (“CPFF”) contracts that have not been funded. The Company excludes from backlog any contracts or awards for which it has not received authorization to ~~proceed and associated funding. The~~proceed. On fixed price contracts, the Company ~~expects these~~excludes any unfunded portion. Over time, as partially funded contracts to become fully funded, ~~over time.~~the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of the revenues or profits (losses) which may be realized when the results of such contracts are reported.

The Company believes that its liquidity is adequate to meet its operating and investment needs through at least ~~December 14, 2019~~September 17, 2020 and the foreseeable future.

The Company’s international business ismay be subject to changes where contracts are delineated in ~~demand or pricing resulting from fluctuations in currency exchange rates in~~currencies other than the ~~Chinese Renminbi to U.S. Dollar exchange rate.~~US Dollar.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of ~~October~~July 31, ~~2018,~~2019, the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be included in its reports that it filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in ~~Securities and Exchange Commission~~SEC rules and forms.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~fiscal quarter~~three months ended ~~October~~July 31, ~~2018~~2019 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

2619

Table of Contents

PART II. OTHER INFORMATION

Item 6. Exhibits

31.1 -	Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 -	Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 -	Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101~~101-	The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~October~~July 31, ~~2018~~2019 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive ~~(Loss) Income,~~Loss, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity and ~~(iv)~~(v) Notes to Condensed Consolidated Financial Statements.

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FREQUENCY ELECTRONICS, INC.

(Registrant)

Date: ~~December 14, 2018 BY~~September 16, 2019 By: /s/ Steven L. Bernstein

Steven L. Bernstein

Chief Financial Officer, Secretary and Treasurer

Signing on behalf of the registrant and as principal financial officer

	Periods ended October 31, 2017
	Six months			Three months
	(UNAUDITED)			(UNAUDITED)
	(In thousands)
Revenues	$	1,955		$	943
Cost of Revenues		1,390			674
Gross Margin		565			269
Selling and administrative expenses		703			346
Research and development expenses		268			118
Operating Loss		(406	)		(195	)
Other income (expense):
Investment (loss) income
Other income (expense), net		(3	)		(2	)
Loss before provision for income taxes		(409	)		(197	)
Benefit for income taxes		1			5
Net Loss	$	(408	)	$	(192	)

	October 31, 2018
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Fixed income securities	$	7,522	$	3	$	(184	)	$	7,341

Current	$	1,114
Due after one year through five years		2,898
Due after five years through ten years		3,510
	$	7,522

	Balance at April 30, 2018			Adjustments				Balance at May 1, 2018
ASSETS
Costs and estimated earnings in excess of billings, net	$	5,094		$	1,435		(a)	$	6,529
Inventories, net		26,186			(929	)	(b)		25,257
Prepaid expenses and other		1,050			77		(c)		1,127
Total current assets		52,075			583				52,658
Other assets		2,850			10		(d)		2,860
Total assets		83,584			593				84,177

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued liabilities	$	3,416		$	97		(e)	$	3,513
Total current liabilities		5,257			97				5,354
Deferred rent and other liabilities		1,524			12		(f)		1,536
Total liabilities		20,322			109				20,431
(Accumulated deficit) Retained Earnings		(65	)		484		(g)		419
Total stockholders’ equity		63,262			484				63,746
Total liabilities and stockholders’ equity		83,584			593				84,177

	As Reported		Adjustments				Balances Without Adoption of ASU 2014-09
ASSETS
Costs and estimated earnings in excess of billings, net	$	7,047	$	3,487		(a)	$	3,560
Inventories, net		25,648		(1,994	)	(b)		27,642
Prepaid expenses and other		1,001		46		(c)		955
Total current assets		51,680		1,539				50,141
Other assets		3,628		5		(d)		3,623
Total assets		83,662		1,544				82,118

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued liabilities	$	3,179		61		(e)		3,118
Total current liabilities		4,252		61				4,191
Deferred rent and other liabilities		1,479		12		(f)		1,467
Total liabilities		19,438		73				19,365
Retained Earnings (Accumulated deficit)		572		1,471		(g)		(899	)
Total stockholders’ equity		64,224		1,471				62,753
Total liabilities and stockholders’ equity		83,662		1,544				82,118

Six Months Ended October 31, 2018:	As Reported			Adjustments			Balances Without Adoption of ASU 2014-09
Revenues	$	23,153		$	2,052		$	21,101
Cost of revenues		14,860			1,065			13,795
Gross profit		8,293			989			7,304
Selling and administrative expenses		5,182			0	(a)		5,182
Operating profit (loss)		(146	)		988			(1,134	)
Income (loss) before provision for income taxes		130			988			(858	)
Net income (loss)		153			988			(835	)